Slashed valuations, mass layoffs, a funding drought and shuttered IPO market. For most, 2022 won’t be remembered as a stellar vintage for the fintech sector.
But it wasn’t all doom and gloom, according to new analysis from investment bank Peel Hunt. A new note from the firm today says the spectacular bursting of the fintech bubble in 2022 has helped “weed out the weak business models” in the sector and shifted the market towards an ultimately more sustainable emphasis on profitable growth.
Analysts at the firm have now urged investors not to take a “myopic” view of the market and have doubled down on the “compelling long-term investment thesis” of the fintech sector.
“We liken the development of the fintech sector to that of the internet sector, with 2022 reactions mimicking the Dot-Com crash of 2000,” fintech analysts Gautham Pillai and Advika Jalan, said in a new report.
“However, as we saw with the Internet sector in the following two decades, we believe 2022 has helped to weed out the weaker business models in the fintech space and showed the resilience of the rest of the vendors, which are focused on profitable growth.”
Fintech venture downturn
The analysis comes despite a sharp downturn in valuations last year as venture capital funding dried up after a decade-long funding frenzy.
Prices slumped across nearly every stage of fundraising in 2022 as investors soured on high-growth loss-making business models that had tempted in bumper rounds over the past decade.
Series D and later funding rounds saw valuations fall by 27 per cent in the third quarter of the year, bringing them down to nearly 2020 valuation levels, a recent report from data firm CBInsights found.
UK fintech funding dipped eight per cent to $12.5bn last year but held up more strongly than rival markets, with global funding contracting by around a third.
In its report today, Peel Hunt advised investors to shrug off the slump and back the largely unlisted sector via London-listed venture vehicle Augmentum.
The firm also reiterated its buy rating on a smattering of listed fintechs including Alfa Financial Software, Eckoh, Equals and Network International.
“The current market malaise masks the opportunity presented by the vibrant UK fintech sector,” the analysts said.
Speaking exclusively with City A.M. last week, Augmentum chief Tim Levene said investment was likely to begin flowing back into the market in the second half of the year as investors put stored-up dry powder to use.
“I think the general consensus view is that the first half of the year will be quieter than the second half, as people start to see how the economic impact plays out in the UK and and beyond across Europe,” he said.
“There’s a lot of capital that needs to be deployed,” he added.